PRECISION OPTICS CORPORATION INC

Previous wording

We produce micro-precision optics, which are nominally millimeter sized and smaller cameras with low manufacturing costs. The small size provides visualization for new procedures in new parts of the body and for existing procedures that are currently performed blind or with sub-optimal imaging, facilitating the development of new surgical procedures that are currently impractical. We use patented and patent-pending approaches to fabricating opto-mechanical and opto-electronic systems. We have developed and helped commercialize applications for numerous customers in the medical device and defense/aerospace industries.

Current wording

We produce micro-precision optics, which are millimeter-sized and smaller cameras with low manufacturing costs. The small size provides visualization for new procedures in new parts of the body and for existing procedures that are currently performed blind or with sub-optimal imaging, facilitating the development of new surgical procedures that are currently impractical. We use patented and patent-pending approaches to fabricating opto-mechanical and opto-electronic systems. We have developed and helped commercialize applications for numerous customers in the medical device and defense/aerospace industries.

Previous wording

We believe that our future success depends to a large degree on our ability to develop new optical products and services to enhance the performance characteristics and methods of manufacture or existing products. Competition amongst medical device companies is increasing with multiple companies now pursuing less expensive, procedure specific robotic systems. We expect to continue to seek and obtain product-related design and development contracts with customers and to selectively invest our own funds on research and development, particularly in the areas of Microprecision™ optics, micro medical cameras, illumination, single-use endoscopes, and 3D endoscopes. We are one of only a handful of companies in the world to design and provide high-quality 3D endoscopes. By designing systems with low manufacturing costs, we have also begun to penetrate the single-use endoscope market. Single-use endoscopes virtually eliminate the potential for patient cross-contamination and support a number of additional operational benefits for hospitals and surgeons. We estimate this segment of the overall minimally invasive surgical market is growing at two to three times the rate of the overall market.

Current wording

We believe that our future success depends to a large degree on our ability to develop new optical products and services to enhance the performance characteristics and methods of manufacture of existing products. Competition among medical device companies is increasing with multiple companies now pursuing less expensive, procedure specific robotic systems. We expect to continue to seek and obtain product-related design and development contracts with customers and to selectively invest our own funds on research and development, particularly in the areas of Microprecision TM optics, micro medical cameras, illumination, single-use endoscopes, and 3D endoscopes. We are one of only a handful of companies in the world to design and provide 3D endoscopes. By designing systems with low manufacturing costs, we have also begun to penetrate the single-use endoscope market. Single-use endoscopes virtually eliminate the potential for patient cross-contamination and support a number of additional operational benefits for hospitals and surgeons. We estimate this segment of the overall minimally invasive surgical market is growing at two to three times the rate of the overall market.

Previous wording

Current sales and marketing activities are intended to broaden awareness of the benefits of our new technology platforms and our successful application of these new technologies to medical device projects requiring surgical-grade visualization from millimeter sized devices and 3D endoscopy, including single-use products and assemblies.

Current wording

Current sales and marketing activities are intended to broaden awareness of the benefits of our new technology platforms and our successful application of these new technologies to medical device projects requiring surgery-grade visualization from millimeter sized devices and 3D endoscopy, including single-use products and assemblies.

Previous wording

Total revenues for the quarter ended December 31, 2023 were $4,824,289, as compared to $5,886,961 for the same period in the prior year, and for the six months ended December 31, 2023 was $9,145,544 as compared to $10,972,262 for the same period in the prior year, a decrease of $1,826,718, or 16.6%. A decrease of $600,000 in both periods was attributable to the sale of one-time technology rights recognized in the prior year.

Current wording

Total revenues for the quarter ended March 31, 2024 were $5,242,579, as compared to $5,048,065 for the same period in the prior year, an increase of $194,514 or 3.9%. Total revenues for the nine months ended March 31, 2024 were $14,388,123 as compared to $16,020,327 for the same period in the prior year, a decrease of $1,632,204, or 10.2%. Of this decrease, $600,000 was attributable to the sale of one-time technology rights sold in December 2022.

Previous wording

Revenue from Engineering Design Services increased 33.1% and 24.6% during the three- and six-month periods ending December 31, 2023 from the same periods in the year ending December 31, 2022. Revenue increases in the engineering category resulted from increasing demand for services and expansion of engineering capacity. Engineering sales were driven by customer design engagements that will be transitioning into the later manufacture of new Finished Products and Assemblies.

Current wording

Revenue from Engineering Design Services increased 62.4% and 35.7% during the three- and nine-month periods ending March 31, 2024 from the prior year periods ending March 31, 2023. Revenue increases in the engineering design services resulted from increasing demand for services and continued expansion of engineering capacity. Engineering sales were driven by customer design engagements that will be transitioning into the later manufacture of new Finished Products and Assemblies.

Previous wording

Revenue from Optical Components decreased 23.3% and 25.8% during the three- and six-month periods ending December 31, 2023 from the same periods in the year ending December 31, 2022 due in part to reduced industry demand. We believe the decreases in optical components were largely driven by lower order volumes as customers sought to rebalance their inventories, which had previously grown beyond sustainable levels due to increased ordering in response to concerns about supply chain disruptions.

Current wording

Revenue from Optical Components decreased 7.9% and 19.9% during the three- and nine-month periods ending March 31, 2024 from the prior year periods ending March 31, 2023, due in large part to reduced industry demand. We believe the decreases in optical components continue to be driven by lower order volumes as customers sought to rebalance their inventories, which had previously grown beyond sustainable levels due to increased ordering in response to concerns about supply chain disruptions.

Previous wording

Revenue from Finished Products and Assemblies decreased 42.4% and 38.9% during the three- and six-month periods ending December 31, 2023 from the same periods in the year ending December 31, 2022. The decreases in Finished Products and Assemblies was attributable to timing differences between the exit of certain mature customer programs and reorders for ongoing products and the introduction of new customer programs, primarily single-use medical devices and new defense / aerospace opportunities.

Current wording

Revenue from Finished Products and Assemblies decreased 45.5% and 41.3% during the three- and nine-month periods ending March 31, 2024 from the prior year periods ending March 31, 2023. The decreases in Finished Products and Assemblies were attributable to timing differences between the exit of certain mature customer programs and reorders for ongoing products and the introduction of new customer programs, primarily single-use medical devices and new defense / aerospace opportunities.

Previous wording

Gross margin decreased to 30.1% during the three months ended December 30, 2023, compared to 44.2% for the three months ended December 31, 2022, and decreased to 31.9% during the six months ended December 31, 2023 compared to 38.6% during the six months ended December 31, 2022. Gross profit decreased to $1,450,976 during the three months ended December 31, 2023, compared to $2,599,472 for the three months ended December 31, 2022, and decreased to $2,914,587 during the six months ended December 31, 2023 compared to $4,238,913 during the six months ended December 31, 2022, primarily driven by changes in the product sales mix and the decreases in revenue discussed above. The $600,000 in Technology rights revenue in the prior year had a significant impact on gross margin as it had no cost of sales associated with it. Excluding that revenue from both sales and gross profit for comparison purposes, the gross margin would have been 37.8% and 35.1% for the three- and six-month periods ending December 31, 2022, respectively. In addition, we recorded an increase in our reserve for excess and obsolete inventory in the amount of $75,000.

Current wording

Gross margin increased to 35.5% during the three months ended March 31, 2024, compared to 34.4% for the three months ended March 31, 2023, and decreased to 33.2% during the nine months ended March 31, 2024 compared to 37.3% during the nine months ended March 31, 2023. Gross profit increased to $1,858,737 during the three months ended March 31, 2024, compared to $1,736,098 for the three months ended March 31, 2023, and decreased to $4,773,324 during the nine months ended March 31, 2024 compared to $5,975,011 during the nine months ended March 31, 2024, primarily driven by changes in the product sales mix and the decreases in revenue discussed above. The $600,000 in Technology rights revenue in the prior year had a significant impact on gross margin as it did not have any cost of sales associated with it. Excluding that revenue from both sales and gross profit for comparison purposes, the gross margin would have been 34.9% for the nine-month period ending March 31, 2023.

Previous wording

R&D expenses increased $66,464 to $221,728 during the three months ended December 31, 2023, compared to $155,264 during the three months ended December 31, 2022, and increased $68,595 to $434,486 during the six months ended December 31, 2023, compared to $365,891 during the six months ended December 31, 2022. The increase in R&D expenses was primarily due to employee-related expenses to support product improvements and the development of new technologies.

Current wording

R&D expenses decreased $13,602 to $192,773 during the three months ended March 31, 2024, compared to $206,375 during the three months ended March 31, 2023, and decreased $33,259 to $627,259 during the nine months ended March 31, 2024, compared to $660,518 during the nine months ended March 31, 2023. R&D expenses for the period represent employee-related expenses to support product improvements and the development of new technologies.

Previous wording

SG&A expenses increased $60,267 to $1,933,410 during the three months ended December 31, 2023, compared to $1,873,143 during the three months ended December 31, 2022, and increased $185,797, or 5.5%, to $3,589,556 during the six months ended December 31, 2023, compared to $3,403,759 during the six months ended December 31, 2022. The increase in SG&A was primarily due to increased personnel costs, increased travel-related expenses, increased stock-based compensation and increases in our reserve for doubtful accounts.

Current wording

SG&A expenses decreased $98,500, or 4.9% to $1,924,491 during the three months ended March 31, 2024, compared to $2,022,991 during the three months ended March 31, 2023, and increased $175,549, or 3.3%, to $5,514,047 during the nine months ended March 31, 2024, compared to $5,338,498 during the nine months ended March 31, 2023. The increase in SG&A for the nine-month period was primarily due to increased travel and marketing-related expenses and increases in our reserve for doubtful accounts.

Previous wording

During the six months ended December 31, 2023, cash on hand funded increases in inventory of $323,770 and a net decrease in accounts payable and accrued expenses of $945,002, partially offset by decreases in accounts receivable of $395,863. We also made payments of $277,912 on our term notes and capital leases. These items, in addition to the impact of the quarterly net loss, net of depreciation, amortization, stock-based compensation and other non-cash items, resulted in a decrease of $1,938,808 in our cash and cash equivalents at December 31 2023 from $2,925,852 at June 30, 2023 to $987,044 at December 31, 2023.

Current wording

During the nine months ended March 31, 2024, cash on hand funded increases in inventory of $256,005 and a net decrease in accounts payable and accrued expenses of $843,872 and an increase of accounts receivable netted with increased customer deposit liabilities of $26,127. We also made payments of $17,109 on our term notes and capital leases and borrowed $400,000 on our revolving line of credit. These items, in addition to the impact of the quarterly net loss, net of depreciation, amortization, stock-based compensation and other non-cash items, resulted in a decrease of $2,000,785 in our cash and cash equivalents at March 31 2024 from $2,925,852 at June 30, 2023 to $925,067 at March 31, 2024.

Previous wording

In October 2021 we entered a $2,600,000 term loan with a commercial bank. In June 2023 we added a second term loan in the amount of $750,000. We secured a $250,000 line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022 and to $1,250,000 in June 2023. There were no borrowings outstanding on the line of credit on December 31, 2023 and full availability in the amount of $1,250,000.

Current wording

In October 2021 we entered a $2,600,000 term loan with a commercial bank. In June 2023 we added a second term loan in the amount of $750,000. We secured a $250,000 line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022 and to $1,250,000 in June 2023. There were $400,000 in borrowings outstanding on the line of credit on March 31, 2024 and additional availability in the amount of $850,000.

Previous wording

Capital equipment expenditures and additional patent costs during the six months ended December 31, 2023 and in the same period in the prior year were $170,772 and $37,637, respectively. The increase was primarily attributable to the implementation of a new computer system.

Current wording

Capital equipment expenditures and additional patent costs during the nine months ended March 31, 2024 and in the same period in the prior year were $260,804 and $21,276, respectively. The increase was primarily attributable to the implementation of new computer systems.

Previous wording

We have contractual cash commitments related to open purchase orders as of December 31, 2023 of approximately $3,163,000.

Current wording

We have contractual cash commitments related to open purchase orders as of March 31, 2024 of approximately $2,500,000.